Business Entity Formation and S-Corps

February 17, 2021 8:00 pm.

Business Entity


An “S-Corp” is a ‘tax election’, not a ‘legal designation’. “S-Corp” designation means that the underlying business has “elected” to be taxed under Subchapter S of Chapter 1 of the IRS code. Persons wanting to “set up an S-Corp”, need to know it is a two-part process: First, you need to establish the underlying business entity at the state level, i.e.: the ‘legal designation’, for example, a C-Corp or an LLC (more on this, below). Secondly, an experienced CPA can determine if your entity meets the criteria set forth by the IRS to be eligible for S-Corp designation. Should your business meet the IRS’s criteria, your CPA can complete the appropriate IRS form and submit it for you. Every business owner should have an experienced CPA in their arsenal, because they can provide a wealth of valuable, cost-saving information. A CPA’s knowledge of various tax treatments, IRS ramifications, and other items can be vital in making on-going business decisions. Your CPA can also assist you with applicable state level taxation filing requirements.

Business Entity Formation

Business entity formations are left to the individual states to determine how businesses within their borders may function. Each of the 50 states examines their own criteria to determine what types of business entities will be allowable within their state. Individual states also decide what requirements each business type will need to meet and when. For example, individual state requirements concerning shareholders, meetings, members, reporting requirements, registration, and many other considerations can be found in that state’s statutes. What is required somewhere else may be different from what is required in Colorado.

All of the state mandated criteria are designed to be beneficial to that state and its citizens. Some states mandate individual notice requirements for spouses, some require new businesses to post a bond, and the list goes on. People have been known to shop around, looking for state requirements favorable to their interests. Some states like to attract business owners, which is often reflected in their business requirement statutes.

Business Registration

However, in some ways, all states function similarly. One example is registering your business with the state’s Secretary of State’s office. If you are doing business within a state, you should be registered within that state, even as a foreign entity, if that’s applicable to you. In most circumstances, merely registering your business with the Secretary of State’s office is not nearly enough. Regardless of your entity type, you should ensure you have a corporate compliance plan. Some companies require a more robust corporate compliance plan, but some are as simple as annual compliance. An experienced business attorney can help you establish a corporate compliance plan that works for your business so you remain in good standing with the state.

“Corporate formalities”

Failure to adhere to “all” of the state’s requirements applicable to your entity type can be a costly mistake. Within each state’s statutes are a multitude of various “corporate formalities” to be adhered to. The term “corporate formalities”, while stating the word “corporate”, usually apply to other business types, too, such as an LLC. Failure to comply with state requirements regarding such formalities may result in your entity being “disregarded” by authorities. The opposition may attempt to “pierce the corporate veil” and attempt to access your personal assets. Here again, the term “corporate” is also extended to other entity types. Either of these two scenarios approaching your door, it’s usually not a good thing.

Many people think of their business entity as a “wall” between their business concerns and their personal assets. Applying “corporate formalities” to this concept, each formality would be a part of that wall. Some of the corporate formalities are smaller and can be thought of as bricks, while others are larger and can be thought of as cinder blocks. They all work together to build your wall. The more bricks and cinderblocks in your wall, the stronger it will be. Merely filing a registration with the state Secretary of State is one piece of paper. If you want a wall stronger than paper, you’ll need to follow all “corporate formalities” applicable to your entity.

Established Business Entity

Once established, businesses often need help with corporate compliance. Business owners have many demands for their attention from day to day and its common for this area to get behind. Or, an event is about to occur for which they need to ensure their business is current. Sometimes, owners need to change their entity type from its original formation. This change would require a corresponding shift in state requirements. Should you need assistance with business conversion, corporate diligence, or updating your company book, please call Susan Larsen.